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Does Hiring Stars from Outside Make an Organization More Competitive?

Two studies by Harvard Business School professors suggest that the answer depends on the similarity of the corporate environment, if the stars can bring his/her support team to the new firm, and the size of the organizations.

Boris Groysberg’s book, Chasing Stars: The Myth of Talent and the Portability of Performance, based in part on earlier research with Ashish Nanda, Andrew McLean, and Nitin Nohria, explores the question and is discussed in 11/8/10 HBS Working Knowledge newsletter.

The first research effort studied “top investment analysts (as identified annually by Institutional Investor magazine) and the organizations that develop and hire them away from each other. Their analysis is based on a large base of data for 1988 through 1996. It includes ratings before and after an analyst's transfer from one investment bank to another as well as the results of extensive interviews over several years of study.”

The results showed that "star analysts who switched employers paid a high price (in performance, not compensation) for jumping ship relative to comparable stars who stayed put."

However, these findings apply only to men who switched firms; women who moved to a new employer did not show a drop in performance. One can debate why: are women, by nature or nurture, more sensitive to the nuances of their environments and more able to build relationships in the new environment, or to be a successful female star takes such talent that portability is relatively easy? Or perhaps another reason exists.

“For those hiring stars, Groysberg says the evidence ‘strongly suggests the wisdom of hiring from firms with similar orientations … and lesser or equivalent quality’ that are less ‘resource-rich’ than one's own, with every effort made to redress the asymmetry in information and inadequate due diligence that almost always accompanies hiring from outside. He suggests that every effort should be made to avoid the ‘winner's curse’ of overbidding to get talent without a clear picture of how they fit into a longer-term strategy.”

“Groysberg, along with Andrew McLean and Nitin Nohria, extended the inquiry to 20 General Electric top executives who moved to high positions in other companies. They concluded that those who ‘took over, built, or implemented management systems that resembled GE's were more successful,’ while ‘those who went to different industries, those who moved solo (rather than with a team), and those who joined companies whose needs (exploiting existing business opportunities as opposed to exploring new business opportunities) called for different skills performed poorly.’"

These studies suggest that an analysis of the potential for success for new top executives at competitors must include the following factors:

Similarity of environments

Ability to bring his/her team along

Relative size or resource availability of the prior and new organizations

Expectation for the performance of the new executive relative to his/her demonstrated successes at the previous employer

Hewlett-Packard has chosen three CEOs in a row from outside the company. The first, Carly Fiorina, failed at providing new vision for the company. Of course, her former employers, AT&T and its spin-off Lucent Technologies, were process companies, not vision organizations. The second, Mark Hurd, had a reputation of being an excellent process manager and excelled at imposing new processes on HP—until he tripped up over inaccurate expense reports. The board then decided on a new strategy for HP emphasizing software, and hired a leader Leo Apotheker from the software industry to make a statement to the world (and the employees) about the company’s future direction.

Of course, other large technology firms have done well with outsiders; Gerstener at IBM, for example. But you should consider the listed factors carefully whenever a competitor hires from outside. Prior success is no guarantee of future performance.

Comments

Does Hiring Stars from Outside Make an Organization More Competitive?

Two studies by Harvard Business School professors suggest that the answer depends on the similarity of the corporate environment, if the stars can bring his/her support team to the new firm, and the size of the organizations.

Boris Groysberg’s book, Chasing Stars: The Myth of Talent and the Portability of Performance, based in part on earlier research with Ashish Nanda, Andrew McLean, and Nitin Nohria, explores the question and is discussed in 11/8/10 HBS Working Knowledge newsletter.

The first research effort studied “top investment analysts (as identified annually by Institutional Investor magazine) and the organizations that develop and hire them away from each other. Their analysis is based on a large base of data for 1988 through 1996. It includes ratings before and after an analyst's transfer from one investment bank to another as well as the results of extensive interviews over several years of study.”

The results showed that "star analysts who switched employers paid a high price (in performance, not compensation) for jumping ship relative to comparable stars who stayed put."

However, these findings apply only to men who switched firms; women who moved to a new employer did not show a drop in performance. One can debate why: are women, by nature or nurture, more sensitive to the nuances of their environments and more able to build relationships in the new environment, or to be a successful female star takes such talent that portability is relatively easy? Or perhaps another reason exists.

“For those hiring stars, Groysberg says the evidence ‘strongly suggests the wisdom of hiring from firms with similar orientations … and lesser or equivalent quality’ that are less ‘resource-rich’ than one's own, with every effort made to redress the asymmetry in information and inadequate due diligence that almost always accompanies hiring from outside. He suggests that every effort should be made to avoid the ‘winner's curse’ of overbidding to get talent without a clear picture of how they fit into a longer-term strategy.”

“Groysberg, along with Andrew McLean and Nitin Nohria, extended the inquiry to 20 General Electric top executives who moved to high positions in other companies. They concluded that those who ‘took over, built, or implemented management systems that resembled GE's were more successful,’ while ‘those who went to different industries, those who moved solo (rather than with a team), and those who joined companies whose needs (exploiting existing business opportunities as opposed to exploring new business opportunities) called for different skills performed poorly.’"

These studies suggest that an analysis of the potential for success for new top executives at competitors must include the following factors:

Similarity of environments

Ability to bring his/her team along

Relative size or resource availability of the prior and new organizations

Expectation for the performance of the new executive relative to his/her demonstrated successes at the previous employer

Hewlett-Packard has chosen three CEOs in a row from outside the company. The first, Carly Fiorina, failed at providing new vision for the company. Of course, her former employers, AT&T and its spin-off Lucent Technologies, were process companies, not vision organizations. The second, Mark Hurd, had a reputation of being an excellent process manager and excelled at imposing new processes on HP—until he tripped up over inaccurate expense reports. The board then decided on a new strategy for HP emphasizing software, and hired a leader Leo Apotheker from the software industry to make a statement to the world (and the employees) about the company’s future direction.

Of course, other large technology firms have done well with outsiders; Gerstener at IBM, for example. But you should consider the listed factors carefully whenever a competitor hires from outside. Prior success is no guarantee of future performance.